4 Essential Elements to Consider When Determining the Value of Kauai Real Estate
Whether you are buying or selling, here are 4 essential elements to consider when determining the value of real estate on Kauai (or anywhere else for that matter). The S.T.U.D. approach outlined below has been an invaluable tool for me over the past 20 years as a realtor and investor.
S.T.U.D. Elements of Determining Real Estate Value
1. Scarcity: How scarce is the property, and how many similar properties are currently on the market for sale? Is it in Texas, or is it Kauai? Is it beachfront, Princeville, or a less desirable neighborhood? When a property is scarce, investors are faced with conducting their own cost-benefit analysis. If a property is in high demand but low supply, it will likely be expensive.
2. Transferability: Does the property have a marketable title that can be transferred? Are there liens on the property that won’t clear easily? Will the title company insure it, and can you get a loan on the property?
3. Use (Utility): What is the highest and best use of the property? What is the land zoned for that would maximize and produce the greatest net return over a given period of time? One of the highest and best uses of a property is using it as a vacation rental. On the Island of Kauai, we have only 3 “Resort” neighborhoods in which vacation rentals are legally allowed without obtaining a Transient Vacation Rental license: Princeville, areas of Kapaa, and Poipu. Some properties on Kauai, outside of these designated areas, have “grandfathered” this entitlement, which adds significant value to the property.
4. Demand: Who is the Buyer and why do they want it? How many people would want that property because of the other 3 factors? I always ask myself, “Who will be the Buyer when I want to sell it?” Some factors that have a tendency to affect demand are population, demographics, government, employment, and wage levels. On Kauai, tourism is the greatest factor in driving demand.
Know How the Different Elements Interact
Analyzing the S.T.U.D. elements are essential to determining value. It can be very helpful to have a realtor guide you through the process and help analyze how the different elements interact. For example, a property may be scarce, but if it has limited utility, there will be limited demand for it. To have utility value, real estate should have the ability to provide shelter, income, amenities, or whatever use is being sought.
Scarcity is the present or anticipated supply of a property in relation to the demand for it. Utility creates demand, but demand, to be effective, must be implemented by purchasing power. Otherwise, a person desiring a property cannot acquire it.
Real estate cycles cause fluctuations in the four elements of value. For example, when interest rates increase, fewer buyers are able to qualify for loans. This in turn reduces demand for real estate. This may lead to an over-supply of properties for sale (or a lack of scarcity).
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